The loan-to-value ratio is the comparison of the mortgage balance to the market value of the home. It is calculated by dividing your loan amount by the value of the property you currently own or the one you want to buy. For example, you want to buy a house that costs $400,000. You plan to contribute $40,000 as a down payment, which means your loan will total $360,000. The loan-to-value ratio could therefore be $360,000 / $400,000 = 0.9, or 90%. Or say you want to refinance your current mortgage for a lower interest rate. If your home loan balance is $200,000, and your home is now worth $400,000, then your LTV would be $200,000 / $400,000 = 0.5, or 50%.

How Does LTV Affect Your New Loan?

Mortgage loans are all about risk calculation. Lenders prefer to make mortgages that are highly likely to be repaid. They judge that based on a host of factors, including your credit score and history, your down payment, assets, and your LTV. In general, the lower your LTV, the better when it comes to qualifying for a loan. That being said, there are plenty of loan programs out there that allow for high LTVs, especially those designed for first-time buyers.

LTV Requirements for Different Loans

The loan-to-value qualifications vary by loan type and even by lender. But there are some basic standards for the most common loans:

• Conventional Loans – these can sometimes allow LTVs as high as 97%, meaning borrowers put down 3% of the home price. Lenders compensate for that higher risk by requiring borrowers with an LTV of 80% or more to pay private mortgage insurance, or PMI. This is insurance that protects the lender against loss if you default on the loan. Once you gain enough equity to drop your LTV to 80%, you can cancel your PMI policy.
• FHA Loans – The Federal Housing Administration guarantees these loans, requiring only a 3.5% down payment or a 96.5% loan-to-value (LTV) ratio. Borrowers must pay insurance on these loans, and lenders include the cost in the loan. Even after the LTV drops significantly, the insurance cannot be canceled.
• VA Loans – The Department of Veterans Affairs sponsors these mortgages for active-duty and veteran military members, allowing 100% LTV ratios with no required down payment. VA loan borrowers pay a one-time funding fee instead of mortgage insurance, either upfront or rolled into the loan balance.
• USDA Loans – These loans backed by the U.S. The Department of Agriculture offers these loans for rural home buyers, allowing LTV ratios up to 100%. There is a one-time upfront guarantee fee though, and an annual fee for the life of the loan.

What is a CLTV? – LTV Ratios

You may run into the term combined loan-to-value, or CLTV, ratio if you are applying for a second mortgage, like a home equity loan or a line of credit. This calculates the combined totals of your home loans divided by your property value. For instance, if your home is currently worth $400,000 and your first mortgage balance is $200,000. And you apply for a home equity loan of $60,000, your CLTV would be $200,000 + $60,000 / $400,000 = 0.65, or 65%.

LTV ratios are essential for determining the riskiness of your mortgage loan. While not the only factor, lenders carefully consider LTV ratios, and borrowers with lower LTVs are more likely to receive the best rates and terms.

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These materials do not come from HUD or FHA and have not been approved by HUD or any government agency.